Real Estate Insurance: Master Policy vs. Individual Policy Approach

by Kevin D. Connelly, Vice President

Real Estate companies, regardless of portfolio makeup, generally have some things in common: most portfolios consist of a number of different buildings or sites and these various sites typically will not have 100% common ownership. In addition, different properties will have been acquired at different times.

Portfolios structured in this fashion can be insured in a number of different ways, but generally the Insurance Program for these organizations tends to consist of either a “master” program that rolls up all of the properties and their different owners under a blanket insurance program or a program that insures each of the entities within the organization under its own set of insurance policies.

While either approach can be successful, a properly conceived and constructed “master” program has significant benefits in the most situations. Some of the considerations:

1. Limit Adequacy – A “master” program will often be structured with a “blanket” limit of property insurance or a “loss limit” which is adequate to insure the largest possible loss in any once occurrence. This can have great advantages over a program which simply insures each property individually. Should the individually insured program have a stated valuation that is not sufficient to cover a total loss, an uninsured loss could occur. This is much more likely to happen in a program that insures each property individually than in one with the backstop of a blanket limit or very high loss limit.
2. Standardization of Coverage Terms – Let’s assume that organization to be insured is made up of twenty different limited partnerships that own different properties. If each property (or LP) were to be insured individually, each line of coverage in each program would need to be negotiated twenty different times. Negotiating and placing twenty different insurance programs leaves significantly more chance for errors to occur in any given program. The ability to negotiate all of the coverages at the same time, for all of the entities will likely result in a more solidly constructed insurance program. It is also easier to negotiate desirable coverage enhancements in a large program as opposed to a small other.
3. Economies of Scale – Similar to the ability to negotiate broadened coverages under a master program, combining all the entities in order to procure insurance for all of them at once will often result in economies of scale savings that could not be achieved when insuring the properties on a one off basis. If an Insurer is pricing two deals they are much more likely to provide attractive pricing on the one that is twenty times larger than the other.
4. Single Renewal Date – Many real estate owners struggle with many insurance programs that renew throughout the year. In addition to the administrative burden of continuously being in the midst of an insurance renewal, having a number of different insurance programs continually being negotiated, bound and financed leaves a great deal of room for errors to occur during the process. Additionally, payment for a “master” program can be arranged to smooth cash flows throughout the year.
5. Acquisition/Divestiture Ease – A master insurance program is the most flexible mechanism for adding and deleting properties throughout the year. Normally as part of such a program there is a pre-set rate for adding and subtracting properties. This removes one of the “moving parts” from a real estate transaction.
6. Ease of Allocation – Insurance budgeting and allocation can be significantly easier in a master program where the insurance spend for each entity is known at the beginning of the policy period and specifically allocated at that point. Similarly, budgeting is simplified since the budget process takes place once a year on an entire portfolio basis instead of property by property.

Obviously, no one method is right for every situation and there can be drawbacks to a master program type approach. If your properties are financed by different lenders (as is usually the case), getting the mortgage companies comfortable with a program that insures numerous properties as opposed to just the one that they are concerned with can be challenge. Typically, a competent broker can easily work through any issues with the mortgage company.

Another common objection to a master set up is the perception that one significant loss could affect the loss history and thus the insurance rates of all the other properties rolled into the program. It is true that loss history does impact premiums. However, it is also usually true that real estate entities that break up their insurance programs often write the pieces with the same carrier. Because of this, a real estate entity might have ten separate property policies with a single carrier. If they suffer a huge loss on one of them it’s likely that the large loss will be factored into the renewal of the rest of the related entities just as it would be under a master program.

A better argument for a non-consolidated program is in cases where the nature of the properties (either by virtue of their use or their location) differs significantly across the portfolio period. Attempting to roll properties in California, coastal Florida, and central Pennsylvania into the same policy may result in a program that sacrifices the utilization of the best carriers for the expediency of a single placement. In a case such as this, a consolidated program could result in significantly higher Florida windstorm premiums than a program that uses the insurers most well suited for the different pieces of the program. Similarly, a high rise office complex and a vacant, non-sprinklered industrial park might not both be best served by the same insurer.

Another consideration for the “master” approach involves broker competition. Procuring and comparing competing quotes from insurance brokers is much simpler with a master program. Instead of gathering, comparing and evaluating numerous stand alone programs, one master program can be compared against another.

There is no “one size fit’s all” solution to the structure of a real estate insurance program. However, in situations that lend themselves to insuring via a master program it’s often the best solution.